Pound Sterling Supported, Bank of England Could Raise Rates Again As Gas Price Surge Extends

• GBP supported ahead of the weekend
• Bank of England rate hike expectations bolstered
• By rising natural gas prices
• U.S. services inflation sends a warning to UK
• And Governor Bailey's comments in Morrocco

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A surge in natural gas prices and an uptick in U.S. core inflation are two signals that could prompt the Bank of England into another rate hike before year-end.

Another rise in gas prices comes on the same day the Bank of England Governor says upcoming decisions will be "tight".

"Squeaky bum time at the Bank of England given the havoc that gas prices did to inflation forecasts last year. Gas futures have gone vertical - a direct feed into the November CPI forecast," says Simon French, Economist at Panmure Gordon.

The lift in gas prices could mean the energy component of the inflation basket will continue to place upward pressure on headline inflation rates, as was the case in August, ultimately bolstering inflation expectations more broadly.

French says just a week ago, gas looked like it would make a downward contribution to 2024 CPI, offsetting oil increases.

That offsetting influence is no longer the case this morning, says French, on a day UK wholesale gas prices surged to £140/therm having been at just £89/therm last week.

Above: UK natural gas for November delivery, source: Barchart.

Factors behind the rise in gas prices include a baltic pipeline leak, lower Israeli supplies and threats of strikes by workers at Australian facilities. But economists say the main culprit is a forecast for unseasonably cold weather in the second half of October which will spike demand.

"Significantly colder weather projected for the second half of October is, in our view, the key driver behind the price rise – and the key risk moving forward as well," says Aldo Spanjer, Senior Commodities Strategist at BNP Paribas in London.

Above: Materially colder temperatures forecasted for northern Europe are driving gas prices higher. Image: BNP Paribas.

Meanwhile, the U.S. Dollar surged on Thursday after the U.S. reported that core services inflation had risen notably in September. The U.S. experience is relevant as the UK appears to be lagging developments there.

Perhaps understandably, the Bank of England's senior rate-setters are sounding cautious about signalling the rate hike cycle is complete.

On Friday, Governor Andrew Bailey told an IMF conference in Marrakech that UK interest rate decisions will be "tight".

He said although there has been solid progress in the fight against inflation, there is still work left to do.

"Our last meeting was such a tight one. And as my colleague Huw Pill said this week, they’re going to go on being tight ones," he said.

Bailey's comments follow those made by the Bank's Chief Economist Huw Pill who said earlier in the week that upcoming calls were "finely balanced".

Last week Ben Broadbent said it was an "open question".

The developments have helped shore up implied market expectations for further rate hikes and push back expectations for the commencement of rate cuts.

For the Pound, these dynamics are supportive.